From the U.S. Government Accountability Office, www.gao.gov
Transcript for: Risks and Benefits of Annuities with Guaranteed Lifetime
Withdrawals
Description: Audio interview by GAO staff with Alicia Puente Cackley,
Director, Financial Markets and Community Investment
Related GAO Work: GAO-13-75: RETIREMENT SECURITY: Annuities with
Guaranteed Lifetime Withdrawals Have Both Benefits and Risks, but
Regulation Varies across States
Released: January 2013
[ Background Music ]
[ Narrator: ] Welcome to GAO's Watchdog Report, your source for news and
information from the U.S. Government Accountability Office. It's January
2013. Facing rising healthcare costs and inflation, retired Americans
are at increasing risk of outliving their assets. To help ensure income
throughout their retirement, some people invest in annuities, with
guaranteed lifetime withdrawal benefits. A group led by Alicia Puente
Cackley, a director in GAO's Financial Markets and Community Investment
team, recently reviewed two such annuity products, focusing on their
implications for consumers and insurers, and the government's efforts to
regulate them. GAO's Sarah Kaczmarek sat down with Alicia to talk about
what they found.
[ Sarah Kaczmarek: ] What are annuities with guaranteed lifetime
withdrawals?
[ Alicia Puente Cackley: ] Well first of all, an annuity is an insurance
contract that allows a consumer to accumulate money for retirement, and
then it guarantees that a lifetime income after some specific date that
they choose. So a guaranteed annuity with lifetime withdrawal is a
feature that provides consumers with the ability to take payments from
the amount that they have accumulated—the amount that they've invested,
so that they have access to their money, even as they're trying to save
for retirement. And then they still have a guaranteed payment once they
do start taking their annuity.
[ Sarah Kaczmarek: ] And can you talk about the two types you compared
for this report?
[ Alicia Puente Cackley: ] We compared two products. One is called a
variable annuity with guaranteed lifetime withdrawal benefit features,
or VAGLWBs, and the other is called a contingent-deferred annuity, or
CDA. And the two products have some features in common. They both deal
with consumers' desire to reduce their risk of outliving their income
and retirement. On the other hand, there are some differences between
the two products. With VAGLWBs, your assets are held by the insurer,
whereas with CDAs you're investing in your own account—you have your own
brokerage account or IRA, and the insurance company is guaranteeing that
you will take a—be able to take a certain amount of money out of the
account over time.
[ Sarah Kaczmarek: ] One of the things you looked at was risks and
benefits to consumers. Can you talk about that?
[ Alicia Puente Cackley: ] There are a couple of different things that
matter for—in terms of the risks that consumers face when they purchase
either VAGLWBs or CDAs. First of all, these are very complex products.
There are differences about—in terms of the fees that you pay, there are
differences in terms of the benefits that you get, and they aren't easy
to compare. So one of the risks is just making a bad decision about what
product you buy, and it's not something that there—that you can
necessarily figure out on your own. It's important to work with a
financial professional, an investment advisor, someone from a brokerage
firm, whoever you normally would look to for financial advice.
[ Sarah Kaczmarek: ] Your team also looked at the extent to which
regulations addressed these risks to consumers. What did you find there?
[ Alicia Puente Cackley: ] What we found is that there's some
differences between VAGLWBs and CDAs in terms of how they're regulated.
VAGLWBs are considered both to be a security, and so they're—that’s
regulated at the federal level by the SEC, and then they're also an
insurance product, so they're regulated by state insurance regulators in
every state where they're sold. CDAs are new products, and the
application of federal law isn't well developed. If they aren't subject
to federal law, they're still subject to state insurance laws. The risk
is that every state may insure these products differently. Some states
have more regulations on the books than others, and so a consumer in one
state who purchases a CDA for example, may be more protected than a
consumer in another state.
[ Sarah Kaczmarek: ] Finally, for consumers who are concerned about the
potential risk to their retirement security, what's the bottom line
here?
[ Alicia Puente Cackley: ] The bottom line is that these are products
that can be of benefit, but they are very complex, they are not
something that you should purchase on a whim. It's important to seek
advice, and it's important to understand exactly what you're purchasing,
and it's important to know for the state that you live in how well
they're regulated.
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